Less than the Least

More on the Chrysler Bankruptcy--Skeel

Several days ago, I wrote a short post noting some of my concerns about the extent to which the government seems to be commandeering the bankruptcy process in Chrysler as a means of effectuating its auto policy. This commentary develops the critique in a bit more detail, and puts it in historical perspective.

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Could you explain more? What I gather from reading your article is that the plan is for Chrysler to sell most of its assets at a low price-- call it X-- to a new company owned by the government and the union. The amount X is then split among the creditors. The creditors are unhappy, because in a normal sale they would get 2X.

That, of course, seems like the very thing bankruptcy is supposed to prevent-- letting the assets slip away to favored parties, leaving the creditors forlorn.

So how can that be legal? If the bankruptcy judge allows it, can't it be reversed by a higher court?

(Is his possible rationale this: Nobody would offer more than X for the assets---though that is true only because the government would punish them if they did, a bit like a Chicago land auction where Al Capone turns out to be the only bidder.)

Eric, this is all correct, but it's even worse than simply the government making a lowball offer and scaring away other bidders. Under the ordinary priority rules, the proceeds of the sale would go to the senior lenders, and they would need to be paid in full before lower priority creditors received anything. By giving employees a stake in the new company, the government is effectively giving them a return on account of their claims (and at least some of this stake is implicitly part of the sale price), despite the fact that the senior lenders won't get anywhere close to full payment. The gov't will argue that the sale price really is just the cash payment (roughly $2 billion) for the assets and that this the best possible price; the seniors are therefore getting the full value of their collateral. But even if this were the case, the seniors should be entitled to share equally with other creditors with respect to the uncollateralized portion of their claims. But b/c the employees will have a stake in the new company, they're getting much more than the creditors who are shut out of the new company. The sale rewrites the priority rules.

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